Why I Might Sell Google
Apr 17th 2012 3:09PM
Updated Apr 17th 2012 3:58PM
This article is part of our Rising Star Portfolio series.
Google's (NAS: GOOG) been a successful component to my socially responsible Rising Stars portfolio thus far, but today the Internet giant has lost some major esteem in my eyes. Its recent decision to split its stock and issue a third class of shares is extremely unfriendly to shareholders.
Forget demeaning shareholders as second-class citizens; being demoted to a voiceless, voteless third-class citizen is even more insulting.
Psychology and split personality
As my colleague Tim Beyers pointed out this week in his exploration of how "evil" Google has become at times, Google's management has always been pretty upfront about not welcoming outside influence on, or interference with, business decisions. However, there's a pretty ironic turnabout going on in this situation.
The New York Times reported that at one point, co-founder and CEO Larry Page said of stock splits: "It's stupid. If you own 10 shares at $40 or one share at $400, it's the same thing! You just need to know how to divide." Exactly.
Stock splits amount to nothing more than, say, metaphorically cutting a pie into pieces and possibly changing some investors' perception of a stock price at first glance. In reality, splits don't add or subtract a bit of value from one's actual financial stake.
Well, so much for railing about the psychology of tricky arithmetic when it comes to the power and ego of management. Google's recent move is all about control. And it's not like Google's founders Page and Sergey Brin didn't possess plenty of voting power before this move; Page, Brin, and chairman and former CEO Eric Schmidt have 66% of the votes at Google.
Previously, Google had two classes of shares, Class A and Class B. Class A shares possessed one vote per share, and Class B shares (owned by folks like Page and Brin) came with a whopping 10 votes per share.
From the perspective of corporate governance, dual-class stock structures are troubling enough. However, when you reach into the realm of triple-class stock structures, things have truly gone over the top. Zynga's (NAS: ZNGA) triple-class structure was shocking. Shockingly offensive, even: Founder Mark Pincus got a class of stock all his own, and those shares pack 70 votes each.
Google's move may not be quite that outrageous, but it's still pretty offensive. The new Class C shares, resulting from a bizarre two-for-one stock split, will bear zero votes. You heard that right -- zilch.
Google brought the dual-class stock structure into the tech world to begin with; previously, this policy was known for its popularity with old-school media companies.
Recent social media IPOs LinkedIn (NAS: LNKD) and Groupon (NAS: GRPN) both have dual-class stock structures. Facebook also will, giving Mark Zuckerberg an awful lot of control over a company he already has a lot of control over.
Maybe Zynga's little stunt upped the ante for how much power founders and management can demand (and shareholders will accept). Maybe Google doesn't want to be outdone in governance-style techno-arrogance.
One way to vote: on principle
There's something hypocritical about companies that decide to go public but apparently don't see much point in answering to shareholders in any way. If corporate managements are on that much of a power trip, maybe they shouldn't have made the decision to go public in the first place.
When I bought shares of Google for this portfolio, I grudgingly accepted the dual-class structure, warning that this was a corporate governance red flag in my risk list. The triple-class structure pushes me from grudgingly accepting of this troubling structure to, quite frankly, becoming kind of angry and insulted.
I know one conventional response is that if one feels so strongly about it, one should sell the shares. Over the course of the last several decades, most investors put their hard-earned money into companies that made them money without giving a hoot about things like ethical business practices or respect for all stakeholders.
And given the fact that my portfolio hinges on principles, don't worry: Selling Google on principle is a definite possibility, although this is a stock I originally believed was a solid hold for years. Take away shareholders' votes and there definitely remains one way to vote -- with our feet.
Management hubris and power trips are long-term risks at any company, and Google just pushed past the boundary of what seems acceptable to me. What do you think? I'm searching for thoughts, so let me know in the comments box below -- I'm feeling lucky.
At the time this article was published Alyce Lomax does not own shares of any of the companies mentioned in her personal portfolio. The Motley Fool owns shares of Google and LinkedIn. Motley Fool newsletter services have recommended buying shares of Google and LinkedIn. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.